401K – Your Preferred Investment Vehicle
Employer sponsored 401K plans have been in place for many years now. For a majority of investors across America, the 401K plan is the primary and preferred method of investing for your retirement. In years past, an individual could count on Social Security, employer provided pension plans and personal savings for meeting retirement needs. In today’s world, you can only count on yourself to produce the level of income your family will need when you retire. There are several advantages to using an employer sponsored 401K that all employees should give strong consideration to.
First and foremost, employer sponsored plans are easy to sign up for and begin investing in. By using payroll deduction, your investment is taken out of your earnings and does not require sending a separate check to invest. Additionally, the payroll deduction allows you to “dollar cost average” your investments. By investing a little each month, you avoid being hurt by large market fluctuations or spending all your money during a peak in the market performance.
One of the key features of a 401K plan is the tax deferred status. For a traditional 401K (check with your employer about Roth features), all of your deductions from your payroll are taken before taxes. This reduces your tax liability in the current year. You do not avoid taxes but defer them to a point in time where you would theoretically be in a lower tax bracket. Most folks will have increased income and therefore increased tax liability in your working years as compared to your retirement years.
Diversification of investments is critical to protecting your investments over time. Using a 401K will provide each of us the opportunity to invest smaller monthly contributions into mutual funds that we would not be able to do on our own. By having a variety of mutual funds, you can diversify across all asset classes and sectors while protecting your investments from unexpected swings in one class, industry or country.
Many companies will provide a matching feature for an amount that the employee contributes each month. This is FREE money!! You should take full advantage of contributing at least what the matching portion is from your employer. There are few investment vehicles where you can double your investment like you can with an employer match program. Most employers will match a minimum of 3% and range up to 6%. Check with your 401K sponsor to see how you can double your investment!
We have been hearing for years about the future demise of the Social Security system and whether we can depend on it to be a reliable source of retirement income. Regardless of the status and regardless of how Congress will address these issues in the future, we must all take responsibility for our retirement income needs. Give strong consideration to planning for your retirement and participate in your company sponsored 401K plan. If your employer does not provide a 401K plan, then visit with your local community bank about IRA options that are available to you.